Back in July, the Office of the Chief Accountant of the US Securities and Exchange Commission (SEC) advised the Securities Industry and Financial Markets Association (SIFMA) that the SEC would not object to the Fixed Income and Clearing Corporation’s (FICC’s) conclusion on the treatment of customer repos cleared by an Agent Clearing Member (ACM) under the FICC’s new Agent Clearing Service (ACS). This conclusion — which is shared by the UST Clearing Working Group of the SIFMA Accounting Committee — is that, for accounting purposes, an ACM should not be treated as a counterparty to its customer but as an agent. Consequently, the ACM’s exposure can be treated as off-balance-sheet.
SIFMA and FICC have achieved what the US repo market has been after for many years, but which the big accountancy firms have resisted — the same off-balance sheet treatment for agency repo as for agency derivatives, writes Richard Comotto, in an analysis on Linked In.
“The basic objection to the agency model is that a broker can pass a trade executed with or by a customer to a CCP and claim that the trade has moved off its balance sheet, despite the fact that the CCP will require the broker to take the trade back on board, should the customer default. The rationale for this treatment has never been clear. The question now is, what is the basis for now extending such treatment to agency repo?
“The economic arguments in favor of the off-balance sheet treatment of ACS are open to question. There will inevitably be a suspicion that its acceptance is an inevitable expedient. How would the agency clearing model work without the incentive of off-balance-sheet treatment and what impact would that have on the feasibility of mandatory central-clearing for many customers?”